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It’s one of the nitty-gritty details you’ll stumble upon when buying a home: the escrow account. And you probably won’t encounter one again anytime soon, at least until you buy your next house.
An escrow account is money held by a third party until all legally required conditions have been met. That trusted third party might be a real estate title company, an attorney’s office or an escrow agent. Once conditions are met, the money is distributed to the recipient(s).
In buying a home, there can be several escrows in play.
The earnest money escrow. This is the deposit you were required to pay to the seller upon the signing of the purchase agreement.
The seller’s deed to the property may be held in escrow until the sale is completed. Then it’s transferred to your name and recorded at the county courthouse.
The mortgage lender may hold the loan proceeds in escrow until the closing is finalized. At that point, the money is distributed to the seller, and perhaps to a prior lienholder — for example, to pay off the loan balance to the seller’s mortgage lender.
The monthly payment escrow, which is established at closing. More on that below.
At closing, you’ll sign the loan and property transfer docs, and your signature will be witnessed by a notary public. That notarization verifies your signature as authentic and valid. Once all of the paperwork has been wrapped up, the funds held in the purchase escrow are distributed to the various parties involved in the sale.
Often another escrow account is then created. Called the monthly payment escrow, it holds the prorated property taxes and other fees that you and the seller have paid. In addition, this escrow often skims a portion from each of your monthly house payments to pay expenses such as annual property taxes and homeowners insurance premiums.
Each year, you’ll receive an escrow statement from your mortgage servicing company reporting the money it collected and the payments drawn from the account. At that time, your monthly note may be adjusted up or down to reflect higher or lower property taxes, insurance premiums or other expenses that are drawn from the escrow account.
There is no fixed fee for escrow services, and escrow charges are not regulated. They often vary according to the value of the home sale. An escrow agent may begin with a fixed fee but then charge for additional services such as wire transfers, copies and office expenses. Escrow charges can also be rolled into the title insurance provider’s fee.
As a part of the closing costs, escrow services are detailed, along with all other fees, as provided in the official Loan Estimate. And you may have negotiated that a portion, if not all, of the escrow fee is to be paid by the seller, along with other closing costs. In some states, it’s typical for the buyer and the seller to split escrow fees.
You know that “boy, I’m glad that’s over with!” feeling? Prepare for a rush of relief like no other! Once you’ve closed the sale and have those precious keys in your hands, all that stands between you and uncontrolled jubilation is that little matter of moving.
But the joy and feeling of accomplishment will stay with you long after the last box is unpacked. Congratulations on your new home!
Hal Bundrick is a staff writer at NerdWallet, a personal finance website.
This article originally appeared on NerdWallet.
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